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Update ARM Holdings

posted on June 28, 2015 at 3:48 pm
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Update: February 11, 2015. It was all about royalties going into ARM Holdings’ (ARMH) February 11 report on fourth quarter earnings. The worry holding the stock down for much of 2014 had been an apparent decline in royalty growth from companies that licensed ARM’s chips to 7% in the fourth quarter of 2013, then to 4% in the first quarter of 2014, and 2% in the second quarter.

Royalty growth had picked up in the third quarter of 2014—to 11% year over year—and the company had guided to mid-teens growth in the fourth quarter. That looked like a recovery but would the company be able to deliver?

For at least the fourth quarter, the answer is Yes. Royalty growth from the company’s licensing of its chip technology climbed to 16% year over year. (In U.S. dollar terms licensing revenue grew 30% year over year.) Net profit, consequently rose to $111 million from a loss in the forth quarter of 2013.

For the rest of 2015 the company said it expects continued momentum in licensing revenue on the strength of growth in smartphone (especially iPhone 6) sales and on the introduction of new smartphones this year incorporating ARM’s 8-A architecture.

Shares of ARM Holdings fell for much of 2014 on the fear that growth in royalty revenue had slowed permanently, but it now looks like stock bottomed at $39.28 on October 22. As of the close today, February 11, at $50.31 shares have gained 28%. On the technical charts, ARM finally showed the 50-day moving average crossing back above the 200-day moving average in late January. That pattern is usually an indication of a continued upward trend.

The company’s product pipeline also points to continued strength. It’s new Cortex A-72 Maya processor has been licensed to a dozen companies including MediaTek. The design, ARM says, is 3.5 times faster than the ARM processors used in most smartphones sold last year and uses 75% less energy. The company’s new Mali-T880 graphics processor for mobile devices also looks to play into the heated competition among smartphone makers to add bigger displays with more graphics while increasing the speed to the user.

ARM Holdings has been a member of my Jubak’s Picks portfolio http://jubakam.com/portfolios/ since October 25, 2013. My gain during that period has been an un-awe-inspiring 5.31%. But I think ARM is moving into a product and royalty cycle sweet spot. As of February 11 I’m raising my target price for June to $60 a share from the prior target of $56.

Sell Apple

posted on June 28, 2015 at 3:27 pm
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I‘m going to sell Apple (AAPL) out of my Jubak’s Picks portfolio http://jubakam.com/portfolios/ today, February 24. The stock has hit my target rice of $132 that I set for March.

And I’m starting to see the kind of hype that I think marks a seasonal high for Apple.

Specifically, I’ve started to see Apple Watch fever.

In the headlines. On February 17, for example, a Reuters story reported a Wall Street Journal story that Apple (AAPL) had asked its Asian suppliers to make 5 to 6 million units of three Apple Watch products for an April launch. Taiwan’s Quanta Computer, the sole assembler of the Apple Watch, would operate 24-hours a day during the Lunar New Year holiday at Quanta’s factory in Changzhou, China to make an entry level Apple Watch Sport model (50% of production), a mid-level Apple Watch (33% of production) and a high-end Apple Watch with a 18-karat gold case.

And in the share price. Apple shares are up 18% from January 27 to the close on February 23 at $133. That puts the share price above the old 52-week and all-time high of $128.88 and near the $135.07 that marks the top of the stock’s Bollinger Band.

Back when Apple reported its December quarter earnings on January 27 the 52-week high was $119.75 and I set a target price of $132 for March. I noted that the December quarter was always the company’s biggest and that it would take runaway excitement about the Apple Watch to send the shares up from their post-December quarter bounce.

Well, we’re seeing that excitement. We’ve got a new high. The shares are at the top of their range. Ask yourself if you think there are a lot of potential Apple buyers out there who don’t already own the stock.

And this is still a seasonal stock that typically falls off as revenue and earnings decline from their December highs into the spring and summer.

So I’m selling in order to take advantage of that seasonality (and the possibility that the Apple Watch will be a success but still fail to live up to expectations)—with the idea of rebuying in July or August

Apple’s shares are up 74% since I added them to this portfolio on May 18, 2012.

Sell Qualcomm

posted on June 27, 2015 at 9:25 pm
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On March 26 http://jubakam.com/2015/03/i-see-signs-of-a-month-of-weakness-in-u-s-equities-ahead-on-growth-worries/ I expressed my worries about falling earnings in the first quarter—with earnings for the Standard & Poor’s 500 companies forecast by Wall Street analysts to decline by 4.8%–and suggested that it was time to raise some cash to hedge against a market retreat and to use in buying bargains if earnings season, due to start next week, created any.

With yesterday’s forecast for 0% GDP growth for the first quarter from the Atlanta Fed http://jubakam.com/2015/04/12750/ I think the danger of a drop on first quarter earnings and growth worries has increased.

And I think it’s time to act on my worries and raise a little cash in my Jubak’s Picks portfolio. I’m not selling today—selling ahead of a 3-day weekend is a good way to get a low price—but on Monday I will be selling shares of Qualcomm (QCOM) out of that portfolio. The shares are up 47.56% as of April 2 since I added them to the portfolio on July 15, 2009.

Why sell Qualcomm in particular right now? (Or on Monday anyway.)

The company’s sales are very leveraged to China and growth in China is falling. Qualcomm announced recently that it had lost a big customer. That is thought to have been Korea’s Samsung. The technology sector has shown relative weakness recently. Qualcomm’s chart shows a troubling pattern of lower highs in 2015. And a bushel of pretty good competitors are all gunning for Qualcomm’s market right now—Intel, Arm Holdings, and MediaTek to name three.

I don’t expect this to be the last sale out of the portfolio in coming days.

Update Apple

posted on June 27, 2015 at 7:58 pm
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Update: April 27. A great quarter for Apple’s iPhone.

A worrying quarter for Apple (AAPL) as the company becomes even more dependent on the strength of one product line up.

For the quarter, the company’s fiscal second quarter, announced today, Apple beat on earnings–$2.33 a share vs. the $2.16 consensus on Wall Street—and revenue–$58.01 billion vs. the $56.1 billon consensus. Gross margins of 40.8% were above guidance of 38.5%-39.5% and the consensus estimate of 39.5%. For the upcoming third quarter the company guided in line with Wall Street expectations. My guess is that’s the usual Apple positioning the bar low enough to jump.

In short a great quarter.

But here’s my worry. For the quarter sales of iPads came to 12.6 million vs. 16.4 million last year and Wall Street estimates of 14 million. For the period Apple sold 4.6 million Mac computers against 4.1 million in the second quarter of fiscal 2014 and Wall Street estimates of 4.6 million.

There’s nothing terribly wrong with those numbers. 12% growth for Mac computers in the current environment for PC sales is actually very impressive. And everybody was expecting a continued decline in iPad sales as tablets continue to see more competition and flagging demand. Although with iPad sales down year over year in seven of the last eight quarters, Apple clearly has an iPad issue.

The problem is that the slow or no growth in iPads and Macs puts all the pressure for growth at Apple on the iPhone. In this quarter Apple’s smart phones delivered with sales of 61.2 million units vs. 43.7 in the second quarter of fiscal 2014 and against the Wall Street consensus of 57 million units.

But we know that iPhone sales run in cycles that depend in good part on how recently Apple released a new and compelling upgrade and the cycle of upgrades at competitors such as Samsung. In the calendar fourth quarter of 2014, for example, the iPhone 6 with its larger screen clawed back share from Samsung and the two companies finished the period in a near dead heat with 19.6% of the global smartphone market after each company shipped 74.5 million phones. But go back a year when Samsung’s bigger screen phones were competing with the Apple 5 and 5S. In the fourth quarter of 2013 Samsung shipped 86 million phones to Apple’s 51 millon.

It’s actually amazing to me that Apple matched Samsung’s unit sales in the fourth quarter of 2014. Apple sells its phones only in the top part of the smartphone market while Samsung competes at the top with Apple and at lower price points with China’s Lenovo and Huawei and others. So in most quarters Apple won’t match Samsung on unit sales because it doesn’t offer products in a good chunk of the global smartphone market. (That strategy also means that Apple kills Samsung on margins.)

The fourth quarter results were partly the result of timing. Apple’s new models launched in the quarter and were going up against older Samsung products since the Korean company wasn’t due for a new product launch in its Galaxy line, the S6, until the calendar first quarter of 2015.

They were also a result of a relatively cool reception for the Galaxy S5. That phone sold about 40% fewer units in the three months after its launch than it’s predecessor the S4 did in its first three months on sale. The phone just didn’t have enough compelling new features to drive people to buy or upgrade.

Apple also got a huge boost with the beginning of wider distribution in China as it began selling phones with China Mobile. China sales climbed 72% year over year. Duplicate that!

So growth in China aside, the biggest challenge for Apple next quarter and the quarter after will be holding onto market share against the new Samsung product. The Galaxy 6 Edge looks like a success with Samsung ramping up a third factory sooner than expected, but numbers for the Galaxy 6 without the edge design could indicate that this model might follow the disappointing sales path of the S5.

The point is that with a bigger share of Apple’s revenue depending on the iPhone, questions like these about Samsung’s newest product become more important. And that means that the risk and potential volatility in Apple’s stock are higher.

A new product with lots of sales that took some of the burden for Apple’s success off the iPhone would reduce that risk. Unfortunately, so far, thanks to Apple’s decision to restrict production of the Apple Watch to give the product a feel of exclusivity, we don’t know what demand for the watch will be. We do know that so far it carries a slightly smaller profit margin than the iPhone. And we certainly don’t know how successful the next big Apple product will be—since we don’t even know what it will be.

I don’t think this worry is enough to say sell Apple shares. (I did sell Apple out of my Jubak’s Picks portfolio after last quarter’ earnings but that was on the basis of seasonal patterns in technology share prices and sales.)

It does say, though, that maybe the thing to track for Apple shareholders right now isn’t the Apple Watch but the sales figures from Samsung.

Intel Update

posted on April 21, 2014 at 1:56 pm
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On April 15 Intel reported first quarter 2014 earnings of 38 cents a share that beat Wall Street estimates by a penny.

But the big surprise—and the big story for technology investors even if they don’t own Intel shares—was the company’s gross profit margin for the quarter. Wall Street had expected 59% and Intel delivered 59.7%.

How’s that for a company that is cutting prices to break into new markets outside its core strengths in PCs and servers?

The price cutting is pretty aggressive. Digitimes reports that Intel has dropped its quad-core tablet processors to less than $5 in China. That brings Intel’s prices just about even with those charged by China-based chipset providers such as Rockchip Electronics and Allwinner Technology, and below the prices for chipsets from Nvidia (NVDA), Qualcomm (QCOM), and MediaTek.

China’s tablet market is projected as the fastest growing in the world in 2014 (global tablet shipments climbed 29.8% in 2013) and the level of technology in so-called white box tablets manufactured in China continues to climb. The price difference between older single core chips and the newer quad –core chips has dropped to about $1 and more and more white-box tablet makers are adding phone functionality to their tablets. Digitimes projects that 50% of white-box tablets will come with phone functions in 2014.

Intel sold 5 million tablet chips in the first quarter—quite a lot of chips for a company that wasn’t even a player in this market not so long ago. The company’s goal for 2014 is 40 million tablet chips. To get to that number Intel needs to grab market share from Chinese chip makers and from Qualcomm and MediaTek. Hence moves like the aggressive price cuts and the new $100 million Intel Capital China Smart Device Innovation Fund

To do that—break into and then grow market share in a new market—and not kill your company’s margins is extremely hard to do. And Intel is doing it in tablets, mobile, and what it calls the Internet of Things. These new efforts are still dwarfed by the PC Client Group ($7.9 billion in first quarter revenue) and the Data Center Group ($3.1 billion). The Mobile and Communication Group showed revenue of just $156 million in the quarter and the Internet of Things Group had revenue of just $482 million.

To generate the first quarter’s margin surprise then, Intel has continued to invest in chip manufacturing—annual capital spending at Intel is up 144% since 2009—even as most of its peers have thrown in the towel on in-house manufacturing and have joined the ranks of fab-less chip “makers” who outsource actual manufacturing to companies such as Taiwan Semiconductor Manufacturing (TSM.) These companies dropped out of manufacturing because they wouldn’t/couldn’t invest the level of capital spending necessary to sustain Moore’s Law. (Moore’s Law, named after Intel co-founder Gordon Moore and initially appearing in a 1965 paper, said that the number of transistors on a chip would double every two years. That would continue to drive processing power up and processing costs down.) Credit Suisse has called Intel the Last Man Standing on Moore’s Law.

If that’s true, and the first quarter margin numbers say it could well be, then Intel is the only chip company with this kind huge advantage. And that advantage would be enough to let Intel catch up in tablets, mobile, and the Internet of things. (I’d say Taiwan Semiconductor is still on the Moore’s Law path but the company is a manufacturer of other companies’ intellectual property.)

It’s still likely to take Intel a while to generate the kind of market penetration that it needs. The company is projecting flat revenue and earnings in 2014. But I think if the company can continue down this path for another two or three quarters, Wall Street will certainly start to notice.

 

Intel is a member of my Dividend Income portfolio http://jubakam.com/portfolios/ . (The shares pay a 3.3% dividend and the company is generating plenty of cash so that dividend increases—and share buybacks–are likely.) I’d set a $32 a share target price of Intel by November 2014.

 

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/, I liquidated all my individual stock holdings and put the money into the fund. The fund did not own shares of Intel as of the end of December. In preparation for closing the fund at the end of May, as of the end of March I had moved the fund’s holdings almost totally to cash.

 



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